Credit: China’s regulatory calibration

Focus on quality and better-rated developers
Chang Wei Liang19 Nov 2021
    Photo credit: Unsplash Photo

    China’s real estate credit pricing continued to improve this week on expectations of further finetuning in regulatory policy. Besides last week’s news of relaxing access to bond financing (see DBS Macro Strategy - Twists and turns in China credit, 12 Nov 2021), China is now planning to allow “high quality” developers to resume issuance of asset-backed securities, ending a freeze that began in August. China is also reportedly planning to relax rules limiting new interbank bond issuance to 85% of outstanding interbank debt, albeit for “high quality” issuers only. Without guidance on how stringent (or lenient) regulatory metrics for quality are, better rated credit enjoys greater certainty, and should see a larger easing of volatility compared to highly leveraged names.

    In fact, volatility in China USD real estate credit had turned extremely elevated since September, as liquidity risks keep spiralling with more developers defaulting, or requesting for debt swaps. Our China real estate DACS subindex widened and narrowed by 50-60bps in just the last 8 weeks, before spreads finally came off on reports of regulatory easing last week. Reports of some key Chinese developers raising liquidity through sales of listed subsidiaries or share placement have reduced short-term default risks as well. Despite an improvement in sentiment, a sharper spread compression for China real estate credit may have to await a rebound in property sales. The regulatory relaxation in credit alone does not mean long term risks have completely abated. This will depend on whether there is any substantive impairment of developers’ inventories going forward.


    Chang Wei Liang

    Credit & FX Strategist
    [email protected]
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